Creative 2004 Annual Report Download - page 28

26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentrations of credit risk
Financial instruments that potentially subject Creative to significant concentrations of credit risk consist principally of cash and cash
equivalents and trade accounts receivable. Creative limits the amount of credit exposure to any one financial institution. Creative sells
its products to original equipment manufacturers, distributors and key retailers. Creative believes that the concentration of credit risk
in its trade receivables is substantially mitigated due to performance of ongoing credit evaluations of its customers’ financial condition,
use of short collection terms, use of letters of credit in certain circumstances, procurement of credit insurance coverage and the
geographical dispersion of sales. Creative establishes allowances for doubtful accounts, returns and discounts for specifically identified
doubtful accounts, returns and discounts based on credit profiles of its customers, current economic trends, contractual terms and
conditions and historical payment, return and discount experience.
Stock-based compensation
Creative accounts for stock-based employee compensation in accordance with Accounting Principles Board Opinion (“APB”) No. 25,
“Accounting for Stock Issued to Employees,” and related Interpretations, and complies with the disclosure provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” and SFAS 148, “Accounting for Stock-
Based Compensation, Transition and Disclosures.” Accordingly, compensation expense for stock options is measured as the excess, if
any, of the fair market value of Creative’s stock at the date of the grant over the stock option exercise price. See Note 9.
Recently issued accounting pronouncements
In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on recognition and measurement guidance previously
discussed under EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”
(“EITF 03-01”). The consensus clarifies the meaning of other-than-temporary impairment and its application to investments in debt and
equity securities, in particular, investments within the scope of FASB Statement No. 115, “Accounting for Certain Investments in Debt
and Equity Securities,” and investments accounted for under the cost method. This consensus is to be applied to other-than-temporary
impairment evaluations in reporting periods beginning after June 15, 2004. The Company does not believe that this consensus will have
a material impact on its consolidated results of operations as its current policies are consistent with the consensus.
In March 2004, the FASB issued a proposed Statement, “Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95,”
that addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for
either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may
be settled by the issuance of such equity instruments. The proposed statement would eliminate the ability to account for share-based
compensation transactions using the intrinsic method that we currently use and generally would require that such transactions be
accounted for using a “fair-value”-based method and recognized as expense in our consolidated statement of operations. The recommended
effective date of the proposed statement is currently for fiscal years beginning after December 15, 2004. Should this proposed statement
be finalized in its current form, it will have an impact on our consolidated statement of operations as we will be required to expense the
“fair-value” of our stock option grants and stock purchases under our employee stock purchase plan.
In April 2004, the Emerging Issues Task Force issued Statement No. 03-06 “Participating Securities and the Two-Class Method Under
FASB Statement No. 128,
Earnings Per Share ” (“EITF 03-06”). EITF 03-06 addresses a number of questions regarding the computation
of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to
participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides
further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security
and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including
how to allocate undistributed earnings to such a security. EITF 03-06 became effective during the quarter ended June 30, 2004, the
adoption of which did not have an impact on the Company’s calculation of earnings per share.
NOTE 2 – NET INCOME (LOSS) PER SHARE
In accordance with SFAS 128, “Earnings per Share,” Creative reports both basic earnings per share and diluted earnings per share. Basic
earnings per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted earnings
per share is computed using the weighted average number of ordinary and potentially dilutive ordinary equivalent shares outstanding
during the period. Ordinary equivalent shares are excluded from the computation if their effect is anti-dilutive. In computing the diluted
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)